Economic Downturn Bodes Ill for Hotel Business

MBA (6/17/2008 ) Murray, Michael
Record-setting oil prices—with some analysts forecasting oil to peak at $150-$155 per barrel or more—do not bode well for the U.S. hotel industry, based on historical trends.

In 2007, a 10 percent increase in real gasoline prices translated to .5 percent demand decline in the U.S. hotel industry. As the dollar continues to weaken, oil increased yesterday morning to nearly $140 per barrel—nearly 40 percent higher from just January.
“There is an effect,” said Bjorn Hanson, principal of hospitality and leisure at PricewaterhouseCoopers LLP, New York. “This year, it is going to cost the industry about four-tenths of an occupancy point. In 2007, it cost the industry about two-tenths of an occupancy point—and that’s just gasoline prices.”

Smith Travel Research, Hendersonville, Tenn., forecasts a 2 percent decline in hotel occupancies this year from 2007, following a nearly 1 percent drop in 2007 from 2006. In 2006, occupancies increased 2.2 percent.

Hanson said PricewaterhouseCoopers studies in process will examine higher fuel prices and its effect on operating costs and air travel. As fuel costs increase, American Airlines said it plans to cut back on flights; United Airlines said it will charge $15-25 for checked luggage; and Delta and U.S. Airways announced job cuts and early retirement packages.

Rising gas prices currently affect the hotel leisure traveler—who drive less to various destinations and stays for less time—while the business traveler continues to spend on larger brands, industry analysts said.

Despite dropping numbers in U.S. hotel occupancies and Revenue Per Available Room (RevPAR) during the first week of June from the year before, average daily rates increased, STR said. It forecasts total U.S. lodging occupancies to hit 62.3 percent this year and 61.6 percent in 2009—down from 63.3 percent in 2006 but better than 59 percent post 9/11.

Industry analysts do not forecast a hotel drop comparable to after 9/11 because the hotel industry was in decline in business and leisure travel before 9/11, and it was the only event to “permanently reset demand generated in the economy,” Hanson said. "It’s the only event in history that has had that effect."

“It’s not anywhere near [post 9/11],” said Bobby Bowers, senior vice president of operations at STR. “If you think about September 11, it’s almost a completely different animal. “

During the first quarter of 2001, the hotel industry softened as corporate travelers were hit harder than leisure travelers, Bowers noted. “The bottom just dropped out,” he said. “We haven’t seen any declines like that since I’ve been in the industry—since 1979. That was just unprecedented—far and away—and it’s not anywhere near like that.”

STR said weekly travel from 2006-2008 increased nearly by nearly three million rooms as weekend travel declined by an equal amount. Weekday room revenues increased by nearly $3 billion from 2006-2008, compared to a $500 million increase for weekend revenues—with a $200 million increase from 2007.

From an economic viewpoint, a slowdown in gross domestic product could produce a “fair-at-best” summer for the hotel industry. June-August of 2007 represented a “pretty good summer,” Bowers noted. “Throw onto that the fuel prices that are going through the roof, throw onto that the mortgage resets, throw onto that these big increases in joblessness, it looks like to me that we’re finally going to shape up to have a summer that’s just not the best."

In April, hotel occupancies in Phoenix dropped nearly 8 percent year-to-date from 2007 while Atlanta and Philadelphia dropped more than 4 percent in occupancies. Chicago and Dallas fell more than 3 percent. However, San Francisco and Boston occupancies increased 3.2 percent and 2.3 percent, respectively.

“Despite the [weak] value of the dollar, there are still fewer occupied room nights inbound from overseas travelers in 2007 than there were in 2000—despite the value of the dollar,” Hanson said. "Cities like New York and San Francisco don’t understand that because they are seeing the opposite. The gateway cities have the largest number of international arrivals but, as a country, the averages don’t work out as favorably.”

In April, the U.S. and United Kingdom occupancy rate tied at 68 percent—while Germany hit nearly 60 percent and Canada had just 26 percent. Australia, Japan and India averaged 75 percent occupancy and the United Arab Emirates had an 86 percent occupancy rate—highest for the countries in the survey.

Average daily hotel rates in Saudi Arabia, India, Russia and the UAE experienced double-digit percent increases from March to April as the same countries showed a nearly 15.5 percent average increase in RevPAR. China’s RevPAR had the largest drop by more than 5 percent.

Jim Butler, chairman of the global hospitality group at the Los Angeles law office Jeffer, Mangels, Butler & Marmaro LLP and author of hotellaw.com, said the mood at a recent New York hotel conference was more somber than it had been “for a long time at hotel conferences” and that attendance fell from last year—less than half of the 3,200 attendees at the Americas Lodging Investment Summit in January.

“Many believe that attendance at these conferences is a good barometer of sentiment in the industry—send more people when times are good, and send fewer when you batten down the hatches for a storm,” Butler said.